On 2 August 2023, Parliament passed the Companies (Directors’ Duties) Amendment Bill (the Bill) at its third and final stage. The Bill amends the duty in section 131 to act in the best interests of the company, by adding wording to clarify, for the avoidance of doubt, that directors can consider matters other than “profit maximisation” – and specifically lists environmental, social, and governance matters as examples.
While the amendment is weaker than its original form (and is therefore, in our view, an improvement), the risks of unintended consequences for Board decision-making and increased litigation still remain.
When originally introduced to Parliament, the Bill stated that directors “may, when determining the best interests of the company, take into account recognised environmental, social and governance factors” with a list of five example factors. This proposal received wide opposition at select committee from various stakeholders, including Bell Gully. We raised concern that the Bill was well-meaning but unnecessary – because directors can, and do already, consider ESG matters where relevant and appropriate to assessing the best interests of the company. We warned that the Bill may have unintended consequences if passed – including increasing litigation risk for directors, encouraging a “check-box” mentality in decision-making and increasing compliance costs.
At select committee, the committee proposed that the amendment read:
“To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit.”
In our update following the select committee report, we noted our view that the change made by the select committee achieved little and would give rise to the same types of risks as the original Bill.
Last week, at committee of the whole stage, the amendment was changed to read:
“To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit (for example, environmental, social, and governance matters).”
The Bill passed its third reading on the morning of 2 August 2023 and will now become law. At its third reading, the Bill was subject to strong debate. The member responsible for the Bill (Camilla Belich) indicated her view that the Bill would “provide clarity and security to those directors who were unsure or uncertain” without increasing compliance costs or creating new duties. In contrast, the opposition expressed its view that the Bill should be “consigned to the dustbin” as it was a “solution looking for a problem”.
In our view, the final form of the Bill addresses some of the concerns we raised in relation to its original formulation. For example, the reference to “considering” the best interests of the company is an improvement on the original wording (“determining” the best interests of the company) and better aligns with the subjective nature of the duty.
That said, we believe that the final form of the Bill illustrates even more clearly that the Bill is unnecessary and the better approach would have been to not proceed with the Bill. It is well-settled that directors, when considering what they believe to be the best interests of the company, are permitted to consider matters wider than profit maximisation, including as appropriate environmental, social, and governance matters. We are disappointed that the Bill was enacted because, in our view, it achieves little but is likely to increase compliance costs and litigation risk.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.